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Possible capital injections for Monte dei Paschi

Troubled Banca Monte dei Paschi di Siena, Italy’s third largest and the world’s oldest bank, recently announced different solutions for their dire situation. The bank came out last in the EBA banking stress test but is determined to find solutions.

Shortly after an emergency plan to raise 5 billion euros of fresh capital was announced, there is growing concern among European regulators that the cash bid will fall short. Although the bank is determined to raise capital by itself, it might request state support. A difficult topic based on the history of Monte dei Paschi, that already received bail out money twice before, and the new EU law that requires the bank to first convert some of its debt into shares.

The EU, the European Central Bank, the European Banking Authority and the European Commission, has responsibility for enforcing rules to stop countries giving local companies an unfair advantage through state aid. This makes it highly unlikely that a government backed bail out as we knew in the past can be implemented. “precautionary recapitalization” of Monte dei Paschi would allow the Italian government though to inject public funds, under certain conditions, without imposing steep losses on all of the bank’s bondholders, as would normally be required by the EU.

In their quest for additional funding and different capital increases, Monte dei Paschi may convert the bulk of its subordinated debt into equity to cut back the planned capital increase and make it more attractive for investors. Unofficial sources and Italian media reported that this plan attracted the attention of several investors and that there is an interest of different investment funds from the Middle East to invest up to 1 billion Euro in the troubled bank.

The plan of the bank to sell a part of their portfolio of bad performing loans worth 30 billion Euro, is not successful thus far. It leaves the stock price of the oldest bank in the world at a staggering 20 Eurocents per share.